If Chinese steel producers get their way, says a recent Caijing Magazine report, major iron ore suppliers will substantially reduce benchmark prices next year.
In an interview with Caijing, Secretary of the China Iron & Steel Association Shan Shanghua complains that Chinese steelmakers have been paying too much for Australian iron ores. He says the current year’s contract price with Australian suppliers is still around US$90 per ton, while weakening demand meant that many steelmakers are now able to buy ore for about US$ 50 per ton on the spot market. Shan is adamant that ore prices should follow steel price fluctuations. Since steel price has fallen to the 1994 level, he intends to ask for a bigger price cut. Records indicate that the 1994 iron ore price was just US$ 16.69 per ton.
Does it mean Chinese steelmakers are going to ask for an 80% discount in the next round of price bargaining? They may try. But I doubt if they are going to be successful. A spokesman from Chinese steel manufacturer Shougang concedes this outrageous proposal is not likely to be acceptable, due to increasing costs of mining. However, he is pushing hard for a minimum 40% price reduction, citing a record ore stockpile (200 million tons) as an excuse.
The steel industry in China is fraught with problems; many of them are very much of the industry’s own making. China’s steel industry is well known for being scattered and disorganized. Many small to medium size players compete unnecessarily for resources and for markets. In the end they are forced to operate in a high cost and low profit margin environment. Consequently, the industry has limited capacity to invest in hi-tech products. Products with little technology content make Chinese steelmakers more vulnerable than their overseas competitors to the current market downturn.
In my view, the entire steel industry in China desperately needs an overhaul, in the form of a massive scale restructuring, possibly through strategic merger and acquisition. Without that, the steel manufacturing industry in China will not be viable. And it would be very unwise for Australian mining companies to put so many of their eggs into this unsustainable basket, albeit its size.